Productivity and Process

In a recent issue of Bloomberg Businessweek, I read an article discussing US productivity.  This is a perennial topic of business magazines, simply because, as the article suggests, it is “hugely important.”  Ultimately, productivity determines both the rate of economic growth and the standard of living that people enjoy.  If workers can make more units per hour, then the cost per unit declines.  That means workers can buy more and the whole economy grows.

In spite of its importance, economists constantly bemoan the fact that they don't have a really good understanding of productivity.  As one economist put it:  It can take years to recognize when productivity is changing, let alone what is causing it.

In spite of this confusion, everyone recognizes that productivity has three basic sources:  hiring cheaper labor, making process improvements and using new technology.  Obviously they overlap, but consider them separately.  Technology in this case refers to new ways things can be done, new tools with which to do things, or new materials that allow both.  Process improvement, in this case, refers to the actual changes in work being done.   You could argue whether technology is involved or not if you simply show a worker a new set of steps to follow to accomplish some assembly task.

In the past decades the world has been amazingly productive, in part because new groups of cheaper employees have been brought into the workforce — in Chana for example,  new technologies have significantly reduced the costs of certain types of work — Computers — and because companies have made better use of business process improvement.   The cost of labor in China is rising rather quickly, and computers are nearing the physical limits of their amazing demonstration of Moore's Law.  Increasingly, companies, especially in the US, will need to rely on getting increases in productivity via process improvement.

Luckily this is still possible.  Few service processes are well designed.  The use of the Web and online shopping has done a lot to reduce service processing costs, but much more can be done.  Similarly, we have only scratched the possibilities of designing more efficient business processes for complex process applications.  The growing demand for tailored products will drive innovation in this area.

The interest in process improvement isn't going to go away soon.  Increasingly, the essence of increasing productivity is investing in process improvement.   And, as the economist said, that's “Hugely important.”